STEPHEN JOHNSON: Why Jim Chalmers’ focus on falling headline inflation is misleading

Jim Chalmers tried his best to put some spin on bad news by focusing on a measure of inflation the Reserve Bank pays less attention to.

“To see headline inflation come down for the second month in a row was a very welcome development,” the Treasurer told reporters in the Blue Room of Canberra’s Parliament House on Wednesday.

A welcome development would mean acknowledging the fact the Reserve Bank looks through the headline inflation number - that includes big-moving price items such as petrol, made cheaper by the Federal Government temporarily slashing fuel taxes by 32 cents a litre.

Yes, the consumer price index eased to 4 per cent in May from April’s annual pace of 4.2 per cent.

But it hasn’t been within the Reserve Bank’s 2-3 per cent target band since July 2025.

In any case, the Reserve Bank’s nine-member monetary policy board pays more attention to underlying inflation which last month grew by an annual pace of 3.6 per cent, up from 3.4 per cent and marking the worst reading since mid-2024.

In multiple media conferences, RBA governor Michele Bullock has made it clear she focuses on the trimmed mean measure of inflation and looks past headline inflation, which fluctuates based on one-off effects like those old electricity rebates and the outgoing fuel tax relief.

“We think that’s the best indicator. Over time you’d expect the two of them to go together, but the trimmed mean smooths out the volatility that you tend to get in the headline,” Ms Bullock said in August 2024, less than a year after Dr Chalmers appointed her as Australia’s first woman to run the RBA.

Like a disc jockey unable to face the music, Dr Chalmers failed to acknowledge this reality on Wednesday when he claimed his Treasury bureaucrats looked at both numbers.

“We pay attention to both measures of inflation and all of the constituent parts of the inflation story in our economy for four years now,” he said.

In another bit of trickery, he emphasised how the consumer price index was going up in North America - without mentioning it by name.

“In other countries, it’s going up. Here in Australia, it’s coming down. We are realistic. We’re not complacent about the future trajectory of inflation but you’d rather headline inflation coming down than going up,” he said.

It’s true the American CPI went up by 4.2 per cent in the year to May, a big increase from April’s annual pace of 3.8 per cent and marking the steepest increase in three years.

But the US Federal Reserve also hasn’t raised rates since July 2023, and cut its policy rate six times in 2024 and 2025.

The American Federal funds rate of 3.75 per cent is also much lower than Australia’s 4.35 per cent cash rate.

The US unemployment rate of 4.3 per cent is also better than Australia’s four-year high jobless level of 4.5 per cent.

Since the US last raised interest rates, the RBA has raised rates four times and cut them three times.

Headline inflation also went up in Canada last month to 3.2 per cent - from 2.8 per cent in April - in a nation with an ultra-low central bank policy rate of 2.25 per cent but a higher jobless rate of 6.6 per cent.

In the UK, Keir Starmer this week resigned as Labour Prime Minister, following a series of bad opinion polls and a restless backbench in the House of Commons, even though inflation in May held steady at 2.8 per cent.

Yet in Australia, Anthony Albanese’s Government hails some great progress in tackling inflation even though it spent $2.55 billion halving an excise for three months from April 1.

The cost of the relief is set to climb past $3b as it’s extended from June 30 to August 2, but at a lower relief rate of 16 cents a litre.

While those billions can help artificially reduce headline inflation, they do nothing to bring down underlying inflation, which means the Reserve Bank could still raise interest rates again to a 15-year high of 4.6 per cent.

Given almost every Australian home borrower is on a variable mortgage rate, every increase is painful.

Another rate rise from the RBA would add $122 to monthly repayments on an average new $735,000 owner-occupier home loan.

Before the US strikes on Iran in February, both headline and underlying inflation were already well above the RBA’s target band.

Federal Government spending is set to make up 26.8 per cent of the economy in 2026-27 - which outside COVID is the highest level since the 1986-87 financial year.

While it’s not directly responsible for inflation, it adds to overall demand in the economy - making the Reserve Bank’s job harder.

Shadow treasurer Tim Wilson has likened Dr Chalmers to an arsonist.

“Jim Chalmers is like the cosplay arsonist pouring debt petrol on the inflation fire, burning away at the future economic prosperity of Australia,” he said.

The Treasurer’s pants aren’t quite on fire.

But his DJ spin about headline inflation - artificially reduced with taxpayer money - makes him more resemble a magician trying to make the audience look somewhere else on the stage.

Only thing is this Government can’t make underlying inflation disappear.

And the Reserve Bank isn’t fooled at this amateur’s efforts to be an economic David Copperfield.